NAIC San Francisco December 5-8 2009
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Opening Session—
Soldier On, State Regulators Urged Click here to read this article.
Joint Executive (EX) Committee/Plenary—
Divided Commissioners Spar Over Capital Relief Tax Proposal Click here to read this article.
Executive (EX) Committee—
Fast Work: EX Zips Through Reports Click here to read this article.
Government Relations (EX) Leadership Council—
Hill Work: Bill Banter Click here to read this article.
Solvency Modernization Initiative (EX) Task Force—
New Solvency Ideas: A Big Issue In A Smaller World Click here to read this article.
NAIC/State Government Liaison Committee—
Nix NISC State Legislators Urge Click here to read this article.
NAIC/Industry Liaison Committee—
Should We Stay or Should We Go Click here to read this article.
Life Insurance and Annuities (A) Committee—
Senior Annuity Issue Guarantees Debate Click here to read this article.
Life and Health Actuarial Task Force—
Fast-Tracked Valuation Manual Hits Year-End Deadline Click here to read this article.
Property and Casualty Insurance (C) Committee—
On Credit Scoring and Chinese Dry Walls Click here to read this article.
Casualty Actuarial and Statistical (C) Task Force—
Cat Modeling Guide Refreshed Click here to read this article.
Blanks (E) Working Group—
Filling in The Blanks Click here to read this article.
Capital Adequacy (E) Task Force—
More Talk On Less Risk Click here to read this article.
Reinsurance (E) Task Force—
Brief Briefs on Reinsurance Click here to read this article.
Financial Regulation Standards and Accreditation (F) Committee—
Finding The Proper Fit For New Standards Click here to read this article.
International Insurance Relations (G) Committee—
Big Issues in a Smaller World Click here to read this article.
Opening Session
NAIC President and Commissioner Roger Sevigny (NH) relayed good wishes to Commissioner Kent Michie (UT) on his retirement. Sevigny said the NAIC would be losing its resident philosopher and acronym translator. He then welcomed state legislators, IAIS Chair Yoshihiro Kawai, Brazilian regulators, and global legislation trainees to the Opening Session.
Host Commissioner Steve Poizner (CA) emphasized the need for state-based regulation, a sentiment that was echoed by several speakers that afternoon. Poizner also called for divestment from Iran. California has passed a law forbidding investment in Iran but there is a loophole that allows third-party investments. Poizner is asking for voluntary divestment by insurance companies from the third-party investments, noting that he will publish names of companies that do not comply and, as a last step, may use his authority to order them to divest.
Dr. Raymond Spudek (FL) received the Robert Dineen Award, which goes to the insurance staff member who has made a significant contribution to insurance regulation.
Sevigny said all the states deserve the NAIC Esprit De Corps Award as, despite the financial storm and reduced staffs, they continue to make significant contributions.
Sevigny reiterated another theme from the winter meeting, which was that no one size fits all solutions. Dedication to consumer protection is for all seasons and commissioners need to talk with their legislators to help them understand these principles. The proposed National Insurance Supervisory Commission would provide the federal government with the expertise of the state regulators and the Solvency Modernization Initiative is a critical self-examination of the U.S. solvency system.
Incoming NAIC President, Commissioner Jane Cline (WV) thanked Sevigny for his work.
Joint Executive (EX) Committee/Plenary
Commissioner Roger Sevigny (NH) chaired the meeting of Joint Executive (EX) Committee/Plenary. There were joint votes of the Executive (EX) Committee and the Plenary when voting to adopt reports and minutes.
The Committee/Plenary adopted:
• The report of the December 6, 2009 Executive (EX) Committee meeting [See a comprehensive report of Executive Committee’s December meeting in this newsletter.];
• The November 5, 2009 Committee/Plenary conference call minutes;
• The September 21-24 Fall National Meeting Minutes of the Committee, Subcommittee, and Task Force, except for items taken up separately
• The 2010 Committee, Subcommittee, and Task Force charges;
• The 2010 Budget;
• The report of the Life Insurance and Annuities (A) Committee. Revisions to the Actuarial Guideline XXXIII—Determining CARVM Reserves for Annuity Contracts with Elective Benefits was adopted on a separate vote. [See a comprehensive report of “A” Committee’s December meeting in this newsletter.];
• The report of the Health Insurance and Managed Care (B) Committee;
• The amendments to the Long-Term Care Insurance Model Regulation (#641). Director Scott Richardson (SC) called for a roll call vote. The vote was unanimous;
• The report of the Property and Casualty Insurance (C) Committee [See a comprehensive report of “C” Committee’s December meeting in this newsletter.];
• The report of the Market Regulation and Consumer Affairs (D) Committee;
• The report of the Financial Condition (E) Committee, except for the following item which was voted on separately;
• SSAP No. 10R, Income Taxes–Revised, A Temporary Replacement of SSAP No. 10. Joe Fritsch (NY), chair of the Statutory Accounting Principles (E) Working Group (SAPWG), reviewed the proposal and said it had been fully vetted by the SAPWG technical people and they will continue working on it over the next two years.
Richardson thought the perception was that this was far from being universally well thought of and, although it may make things consistent, it is only good for large companies and it sounds like the NAIC is nationalizing permitted practices. Richardson asked why, if the proposal has been vetted, the best minds continuing to work on it for two more years? Later he opined felt that they were handing the industry what it wants.
Commissioner Ralph Tyler III (MD) said it is a mistake to do this because it would be a weakening of standards, a piecemeal approach, and the rule would be changed to conform to exceptions. Commissioner Al Gross (VA) supported Tyler and Richardson’s comments and said the RBC charge is a guardrail and it has not been set.
Commissioner Susan Voss (IA) was very comfortable with the proposal and felt action needed to be taken now. She was supported by Commissioner Sean Dilweg (WI) who reminded the Commissioners that only three months ago they had implemented principles-based reserving even though it was a work in progress. Commissioner Thomas Sullivan (CT) suggested this was an opportunity to act in a uniform fashion.
Director Michael McRaith (IL) asked if the vote at “E” Committee was unanimous and was told it had been. Director Mary Jo Hudson (OH) said that market issues of the past year have affected everyone and they need to respond to extraordinary circumstances with permitted practices and noted that there would be two years to evaluate this.
Commissioner Mike Kreidler (WA) felt the proposal was piecemeal and incomplete and the middle of a financial crisis is not the time to turn back the clock. Gross said there were two votes at “E” Committee and the proposal was voted on at SAPWG and the Accounting Practices and Procedures (E) Task Force on conceptual language and implementing language was worked on and exposed. Substantive deliberation did not begin until September 2009. Commissioner Joel Ario (PA) thought the debate showed the strength of the organization and he would vote “yes” because of the uniformity question although he had reservations because of the way permitted practices work had forced the organization into this position.
The proposal was adopted by the Executive Committee by one vote after which the Plenary adopted it by a 33 to 22 vote.;
• The report of the Financial Regulation Standards and Accreditation (F) Committee [See a comprehensive report of “F” Committee’s December meeting in this newsletter.];
• The report of the International Insurance Relations (G) Committee [See a comprehensive report of “G” Committee’s December meeting in this newsletter.].
The Committee/Plenary received reports on state implementation reporting of NAIC adopted Model Laws and Regulations:
• Use of Senior Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities Model Regulation (#278)
• Amendments to Viatical Settlements Model Act (#697)
• Amendments to Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities (#815)
• Amendments to Standard Valuation Law (#820)
• Amendments to Actuarial Opinion and Memorandum Regulation (#822)
• Amendments to Long-Term Care Insurance Model Act (#640) and Long-Term Care Insurance Model Regulation (#641)
• Amendments to Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act (#651)
• Uniform Health Carrier External Review Model Act (#76)
• Medical Professional Liability Closed Claim Reporting Model Law (#77)
• Amendments to Derivative Instruments Model Regulation (#282).
• Amendments to Risk-Based Capital (RBC) for Health Organizations Model Act (#315)
• Amendments to Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385)
• Amendments to Life and Health Insurance Guaranty Association Model Act (#520)
• Amendments to Property and Casualty Insurance Guaranty Association Model Act (#540)
The results of the 2010 Zone Officers vote were announced. Midwestern Zone: Director Michael McRaith (IL) as Chair, Director Merle Scheiber (SD) as Vice Chair, Director Mary Jo Hudson (OH) as Secretary; Northeastern Zone: Commissioner Thomas Sullivan (CT) as Chair, Commissioner Joel Ario (PA) as Vice Chair, Commissioner Paulette Thabault (VT) as Secretary; Southeastern Zone: Director Scott Richardson (SC) as Chair, Commissioner Leslie Newman (TN) as Vice Chair, Commissioner James Donelon (LA) as Secretary; and Western Zone: Director Linda Hall (AK) as Chair, Superintendent Morris Chavez (NM) as Vice Chair, Director Christina Urias (AZ) as Secretary.
NAIC CEO Terri Vaughn gave an update on the executive offices move to Washington, DC and the new Center for Insurance Policy and Research (CIPR). Sevigny added that NAIC DC staff had prepared 16 commissioners for their testimonies in front of Congress.
Executive (EX) Committee
Commissioner Roger Sevigny (NH), chair of the Executive (EX) Committee, started the meeting late but zipped through the reports and adjourned after only 20 minutes.
The Committee adopted the report of the December 5 Meeting of the Joint Executive Committee/Internal Administration (EX1) Subcommittee. The Subcommittee approved creation of a new Market Regulation Accreditation (EX) Task Force reporting to the Executive (EX) Committee to continue evaluating proposals considered by the Market Regulation Accreditation (D) Working Group in 2009 and requested development of proposed charges for a Multi-State Enforcement (EX) Task Force for consideration by the Executive (EX) Committee.
The Committee adopted the October 20 and November 17 conference call minutes.
The Committee approved the formation of a Title Insurance Issues (C) Task Force under the Property and Casualty Insurance (C) Committee and a Market Information Systems (D) Task Force under the Market Regulation and Consumer Affairs (D) Committee.
The Committee approved an additional charge for the Financial Condition (E) Committee to consider assisting in federal anti-money laundering (AML) examinations and consider incorporating ALM exams.
The Committee adopted the Model Law Development Request for Risk-Based Capital (RBC) for Fraternal Benefit Societies Model Act.
The Committee adopted the following written Task Force and Working Group reports. All reports are available on the NAIC website:
• AIG Managing (EX) Task Force;
• Broker Compensation (EX) Task Force;
• Climate Change and Global Warming (EX) Task Force;
• Government Relations (EX) Leadership Council;
• International Insurance Relations (EX) Leadership Council;
• Long-Term (EX) Task Force;
• Military Sales (EX) Working Group;
• Producer Licensing (EX) Task Force;
• SVO Initiatives (EX) Working Group;
• Solvency Modernization Initiative (EX) Task Force;
• Speed to Market (EX) Task Force.
The Committee received quarterly reports on model law development efforts for the following:
• Amendments to Insurance Holding Company System Regulatory Act (#404) and Amendments to Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450);
• Amendments to Standard Nonforfeiture Law for Life Insurance (#808);
• Amendments to Suitability in Annuity Transactions Model Regulation (#275);
• Amendments to Annuity Disclosure Model Regulation (#245);
• Amendments to Nondiscrimination of Health Insurance Coverage in the Group Market Model Regulation (#107);
• Amendments to Small Employer Health Insurance Availability Model Act (Prospective Reinsurance with or without and Opt-out) (#118);
• Amendments to Individual Health Insurance Portability Model Act (#37);
• Amendments to Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act (#651).
The Committee received the report of the NIPR Board of Directors, delivered by Director Linda Hall (AK). The Board has approved the final set of internal polices as recommended by outside counsel and elected its 2010 officers: Hall was re-elected president, William Anderson (National Association of Insurance and Financial Advisors) was re-elected vice president, and Commissioner Leslie Newman (TN) was re-elected secretary/treasurer. The Board also approved the 2010 budget, which included the addition of four staff positions, and a minor change to the NIPR Bylaws to reflect the title of Dr. Terri Vaughan (NAIC).
Commissioner Kim Hudson (OK) gave the report for the SERFF Board. SERFF usage is down 6% since last year. The Board approved SERFF’s 2010 Budget and ratified new officers: Bill Lacy (AR) was re-elected to another year term, Fred Alvarado (Aegon) was re-elected to another life/health term, Theresa Boyce (ACE) was elected as a property/casualty member, and the American Insurance Association (AIA) appointed Robert Yass to a two-year term representing property/casualty insurers. Commissioner Susan Voss (IA) was reappointed for another two-year term as a commissioner member. The Committee ratified the election and appointment of the SERFF Board.
Hudson read the report of the Interstate Insurance Product Regulation Commission (IIPRC). Sevigny commended the IIPRC for its great progress. The Committee received the report.
Government Relations (EX) Leadership Council
Commissioner Roger Sevigny (NH) chaired the meeting of the Government Relations (EX) Leadership Council.
Moira Campion (NAIC staff) gave an update on federal financial regulatory reform legislation. The NAIC has been working with legislators to give them a better understanding of the economics of the insurance industry. The NAIC worked with House representatives on an amendment to carve all business of insurance out of the Consumer Financial Protection Agency Act of 2009 jurisdiction. The Financial Services Improvement Act of 2009 contains essential elements of consumer protection and creates a Financial Services Oversight Council. The NAIC has endorsed the final version of the Federal Insurance Office Act of 2009. It is working with Senate staff to better align the Senate version of the Restoring American Financial Stability Act to the House versions.
Josh Goldberg (NAIC staff) gave an update on health insurance reform legislation. The House had adopted the Affordable Health Care for America Act (H.R. 3962) on November 7. The Senate version looks to states to help develop standards and all bills allow for state flexibility.
Director Scott Richardson (SC) gave an update from the Reinsurance (E) Task Force regarding the Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571). The NAIC has not supported the reinsurance portion of H.R. 2571. The NAIC endorsed the Reinsurance Regulatory Modernization Act but it is not popular among domestic reinsurers and the U.S. Department of the Treasury.
Solvency Modernization Initiative (EX) Task Force
The Solvency Modernization Initiative Task Force received reports from its various working groups and a report on the Seminar on Systemic Risks by the Center for Insurance Policy. The Task Force is chaired by Commissioner Al Gross (VA).
International Solvency Working Group: The International Solvency Working Group met under the chairmanship of Steve Ferguson of Arizona acting for Commissioner Urais. The Working Group expose two papers for comment until March 1: a consultation paper on Regulatory Capital Requirements and Overarching Accounting /Valuation Issues and a consultation paper on Corporate Governance and Risk Management. The comments on both papers will be discussed at a March 11-12 meeting of the Working Group in Phoenix. The consultation paper on Regulatory Capital, prepared by Kris deFrain (NAIC staff) includes a description of the US RBC system and international developments in the area of solvency regulation. The paper is unusual for the NAIC in that it asks a series of 60 questions related to RBC and solvency evaluation. Lou Felice (NY) added that the Capital Adequacy Task Force has appointed a working group, chaired by Alan Seeley (NM), to respond to the questions. The consultation paper on Corporate Governance and Risk Management outlines proposals for corporate governance requirements and discusses a mandatory Own Risk and Solvency Assessment (ORSA). There was no discussion of the papers at the meeting.
The Working Group met jointly with the IAIS Solvency Subcommittee and the meeting included presentations by the NAIC and members of the IAIS subcommittee related to current solvency practices. Mary Miller (OH) described US Risk-Focused Surveillance; Trevor Cooke (UK) reviewed the IAIS Standards and Guidance in the area of solvency; and speakers from Australia, Bermuda, Canada, Switzerland, and the UK reviewed ERM and ORSA practices in their jurisdictions. Presentations from the meeting will be posted on the NAIC’s website. Discussion focused on trying to gain a better understanding of the various systems and how the use of internal models in insurance compared to the use of models for banking.
Group Solvency Issues Subcommittee: The Group Solvency Issues Working Group, co-chaired by Christie Neighbors (NE) and Danny Saenz (TX), divided the time at its three hour meeting between the Model Holding Company Law and a discussion of broader issues related to group supervision. The Working Group reviewed in detail draft revisions to the Insurance Holding Company System Model Act (#40), the Insurance Holding Company System Model Regulation (#450) and the Holding Company Best Practices report. Comments had been received from regulators and interested parties. NAIC staff was instructed to make some drafting changes to the documents and to research key issues. The drafts were exposed for comment. One issue of major concern to both the industry and regulators was the plan to delete in Section 5 (2)(c), the threshold below which reinsurance agreements or modifications did not need to be reported. Currently that threshold is 5% of the insurer’s surplus. Several departments felt the elimination of the threshold would be an administrative burden. Staff was asked to prepare alternative language for consideration. There was also discussion regarding several provisions related to board and management responsibility. State Farm had asked that a clearer statement of purpose be added to the section on colleges of supervisors.
The Working Group discussed the IAIS draft Guidance Paper on the Treatment of Non-Regulated Entities in Group-Wide Supervision. This paper is scheduled to be submitted to the IAIS membership for approval on a fast track basis in February. Ray Spudeck (FL) asked the members to look closely at the sections on contagion risk and financial position. New York will review the appendix describing the AIG situation.
The Working Group discussed a draft memorandum to Commissioner Al Gross (VA), chair of the Solvency Modernization Initiative, outlining a “windows and walls” approach to group supervision. The letter recommends that the NAIC consider enhancements to its group-wide supervision by improving communication between regulators, incorporating supervisory colleges into the regulatory review process, collecting information on non-operating holding companies, considering group capital requirements, and creating a new accreditation standards based on Holding Company Analysis Review Team Guidelines. Morag Fullilove (representing GNAIE) asked that the comment letter reflect in its discussion of group capital requirements, the concept that the approach used in assessing capital adequacy should be based on how an insurer chooses to operate (legal entity vs. consolidated group).
The Working Group heard brief reports from Helen Rowell of Australian Prudential Regulation Authority and Nick Cooke of the UK Financial Services Authority on their group regulatory systems and laws. Questions from the Working Group focused on group capital requirements, fungibility of capital, capital management, and licensing.
The Working Group received a report from the Supervisory Colleges Subgroup indicating that it was examining the issues related to adoption of the IAIS Multilateral Memorandum of Understanding on Cooperation and Information Exchange and developing with the NAIC staff a supervisory college-tracking document.
Ray Spudeck provided a report on the activities of the IAIS Group and Cross-Sectoral Regulation Subcommittee. The Subcommittee is developing a group supervisory framework. At the SMI Task Force meeting, Steve Johnson (PA) asked the Task Force to look at the commitment, including financial and logistical support, the NAIC is willing to make to the states’ participation in colleges. He said the NAIC cannot effectively participate without this support. Joe Fritsch (NY) indicated that the cost of travel to colleges might be added to the examination costs. This change was being considered as part of the Model Holding Company Act changes.
Principles-Based Reserving Working Group: Commissioner Ham (ND) chaired the meeting of the PBR Working Group. The Working Group received a report from Larry Bruning (KS) regarding the activities of the Life and Health Actuarial Task Force, which is working to complete the Valuation Manual so that it can be shown to legislators as part of the package of materials supporting the Standard Valuation Law. LHATF has asked that the deadline for completion of the Manual be delayed to August 2010 to allow the ACLI to complete work on VM-20 regarding the minimum reserve floor for life insurance products. The Working Group agreed with this recommendation given that many state legislatures did not meet in 2009 and that it was important to have a complete product.
The Working Group reviewed and discussed comments on a draft memorandum to the Executive Committee outline options for the NAIV in regard to the collection of data. The Working Group had received three comment letters on the proposal. Two letters supported the NAIC as a repository for the data, but did not support the NAIC as the statistical agency. There was some support for this position expressed by working group members. John Bruins (ACLI ) expressed concerns that the process may be unnecessary because 80% of the data needed comes from a small number of companies; he opposed NAIC involvement suggesting instead a study of the issue. Bruning argued that comparative data was essential to make PBR work, but he agreed to explore the options. The Working Group asked NAIC staff to modify the memorandum to incorporate the comments received and to redistribute it for further discussion.
Corporate Governance Working Group: Director Mike McRaith (IL) reported on the work of the IAIS Corporate Governance Subcommittee, which is now looking at core principles and standards in the area of corporate governance. This work includes a review of remuneration, suitability of persons, licensing, and internal management. Dave Snyder (AIA) expressed concerns that fit and proper testing could be misused. McRaith replied that the US would need to look at whether there needed to be a new standard in this area. Lou Felice (NY) pointed out that there was increasing interest in corporate governance in the US. Kris DeFrain (NAIC) announced that an NAIC Corporate Governance Working Group reporting to the SMIU Task Force would be appointed in 2010.
International Accounting Working Group: Mel Anderson (AR) reported on the meeting of the Working Group, which included a review by Rob Esson (NAIC staff) of the current status of proposals by the International Accounting Standards Board (IASB) related to Financial Instruments and Insurance Contracts. An exposure draft on Insurance Contracts is now expected in April 2009. Working Group members asked for more information on the expected loss model to be used in IFRS 9 Financial Instruments and the “effective interest rate.”
The Working Group also heard a presentation by Jerry de St Paer, Executive Chairman of the Group of North American Enterprises, regarding developments on convergence of FASB and the IASB standards. De St. Paer suggested that the recent delay by the European Commission in acting on Phase I of the Financial Instruments project might allow time for FASB and the IASB to reach agreement. He also stressed that the G-20 is pushing hard for convergence and said that the SEC may soon make an announcement about the Roadmap for convergence. He thought the Roadmap might be extended to 2015.
In response to a question from Marty Carus (AIG) regarding the future of statutory accounting (SSAP) if the US were to adopt international accounting standards, Commissioner Gross indicated that the Executive Committee would be addressing the issue soon and was likely to appoint a Commissioner level committee to look at the question although the exact mechanism for the review has not been determined. Gross added that there is extensive uncertainty as to the structure of the insurance contracts standard, particularly regarding the valuation basis. The NAIC wants to reflect on and reassess its commitment to SSAP. Joe Fritsch (NY) said that SSAP starts with GAAP then makes exceptions, therefore if the US were to adopt IFRS, the same considerations would apply but there may need to be changes make to accommodate the solvency assessment. He and Mel Anderson agreed that leadership was needed from the Commissioners. Doug Stolte (VA) said it might be time to move away from SSAP and put the conservatism into RBC. Rob Esson said the G-20 pressure for uniform international standards makes it important to look at this issue.
Alan Close (ACLI) pointed out that recognition and valuation approaches were critical in deciding on a methodology. Right now the valuation approach being used by the IASB is different from SSAP. Joe Fritsch said he and Rob Esson had met with FASB on the Insurance Contracts project and would continue to do so as the project develops.
Systemic Risk Panel: The NAIC’s Center for Insurance Policy held a symposium on systemic risk on the Thursday before the NAIC meeting. Speakers included Dr. Ray Spudeck (FL), Dr. David Cummins (Temple University), and Commissioner Thomas Sullivan (CT). Spudeck described the increasing concern with systemic risk in light of the financial crisis and the IAIS’ work to develop macro-prudential tools. He said that although the insurance sector is probably not a generator of systemic risk, insurance does provide a natural transmission pathway for systemic risk to the real economy.
Cummins’ presentation provided statistical data to support the conclusion that insurance does not pose systemic risk, although he did mention that life insurers might be more likely to be risky than property and casualty insurers because they are susceptible to withdrawals and the suspension of premium payments. Cummins also provided a review of the events that led to the bailout of AIG. He noted that total guaranty fund assessments in the US from 1988 to 2007 were $18 billion while federal assistance to AIG amounted to $136 billion.
Cummins stated that the main systemic risk posed by the insurance industry comes from participation in banking activities, including credit default swaps. This comment led to discussion as to whether such activity should be allowed. Commissioner Sullivan agreed this was a concern, outlining several threats to the insurance industry including high-risk derivative operations, inaccurate ratings of securities, and major catastrophes. Sullivan went on to describe what he views were the causes of the recent financial crisis – inadequate regulation in the financial services industry, including the Gramm-Leach-Bliley Act, the relaxing of the net capital rule, deregulation of investment banks and hedge funds, off-balance sheet accounting and the unregulated derivatives market. He ended by describing the various Congressional reform proposals.
Spudeck then gave a presentation on group supervision developed by Director Ann Frohman (NE) who was unable to attend the meeting. He compared group regulation in the US with that in other countries. The NAIC’s Group Solvency Issues Working Group is looking at how to improve insurance group and financial conglomerate regulation, including how to deal with federally regulated entities linked to insurers and global developments in group regulation. He added that financial conglomerates pose a bigger risk than insurance groups. Ramon Calderon (NAIC) asked why we needed to care about groups since we only regulated legal entities. Dr. Cummins replied that regulators needed to have an understanding of the entire group.
During the question and answer session, a representative of the New York Federal Bank asked whether a large reinsurer could pose a systemic risk. Spudeck said that a failure could cause disruption, but would probably not create a systemic risk. Cummins agreed, saying that there are not sufficient interconnectedness among reinsurers to create systemic risk. Commissioner Karen Stewart (DL) added that the legal protections in the US would also prevent a failure from having a wide impact.
Morag Fullilove (representing the RAA) pointed out that the IAIS Global Reinsurance Report addresses these issues. The 2009 report is due to be released in December. She also asked a question regarding the importance of compliance with international solvency standard. Cummins replied that the US had fared well in the crisis. While he thought there were some positive aspects of Solvency II, such as the requirement for an Own Risk and Solvency Assessment (ORSA), he expressed concern with overreliance on internal models. He suggested the NAIC consider developing a centralized facility to evaluate models and that a standardized model should be run as a check on the internal model.
Dave Sandberg (Allianz) said that there was little data regarding some of the issues which needed to be explored regarding systemic risk. Commissioner Sullivan added that regulators ignored many of the signs which were present and could have acted better even without data. [The presentations and the audio recording of the session are on the Center’s website.]
NAIC Overview of the US Insurance Financial Solvency Framework: Commissioner Gross announced that the NAIC had completed a paper outlining the principles of the US regulatory system. The goal of the paper is to articulate the US framework as a basis for the SMI review and to assist in explaining the US system to others. Dr. Mary Weiss reviewed the paper at the E Committee meeting.
NAIC/State Government Liaison Committee
Commissioner Roger Sevigny (NH) chaired the meeting of the NAIC/State Government Liaison Committee.
Moira Campion (NAIC staff) reported on federal financial regulatory reform activity. The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) includes three pieces of insurance legislation on which the NAIC worked with House representatives. The NAIC worked on an amendment to carve all business of insurance out of the Consumer Financial Protection Agency Act of 2009 jurisdiction. The Financial Services Improvement Act of 2009 contains essential elements of consumer protection and creates a Financial Services Oversight Council. The third bill is the Federal Insurance Office Act of 2009, which the NAIC originally did not support but after negotiations that led to the final legislation the NAIC endorsed the bill. The NAIC is working with Senate staff to make the proposals of the Senate Restoring American Financial Stability Act more aligned with the House versions. State Representative Brian Kennedy (RI) asked that a more comprehensive report be given to Mike Humphries (NCOIL).
Sevigny reviewed the discussions at the fall meeting on a proposed National Insurance Supervisory Commission (NISC). Sevigny said there would be a public hearing later that afternoon and a summit was planned to continue discussions of the proposal. Director Michael McRaith (IL) expressed the need for uniformity and Director Mary Jo Hudson (OH) said commissioners want to work more efficiently with legislators. Kennedy said he attended the 90-minute forum in Washington, DC and he did not hear one legislator, governor, or attorney general who supported the NISC proposal.
Kennedy believes that insurance commissioners want to take on legislative authority although many of them are not even elected officials. Kennedy added that the National Conference of State Legislatures (NCSL) has not supported the plan and since nothing has changed since the fall meeting there is no need to for a summit. Sevigny assured Kennedy that the Committee is not asking anyone to buy into this now but the NAIC is looking for constructive criticism. McRaith said there are state legislators who support the proposal and there is no presumption of where the proposal would end up.
State Representative Robert Damron (KY) suggested that the Council of State Governments (CSG) should be driving this proposal and not the NAIC, NCOIL, or the NSCL. Commissioner Kim Holland (OK) agreed with Damron’s suggestion. Damron added that the appearance is that the NAIC wants to usurp state legislators’ authority and a neutral third party is needed to help with this process. Hudson said she is very cognizant of legislative authority and the need to maintain balance between the legislative and executive branches. Jane Cline (WV) said that the proposal was always intended to be put forward with state legislators in mind and there was no intention to usurp their authority. Cline is looking at ways to improve processes for the benefit of consumers and the industry and she added that there is no predetermination on where the proposed Commission would be housed or how it would look. Damron said the industry does not want a federal regulator. Sevigny asked that Kennedy, NCOIL, and NSCL submit their comments in writing.
Sevigny said there are concerns on how residential mortgage-backed securities (RMBS) are handled and the NAIC is proposing a new approach. Damron asked why an NAIC rating agency would be better. Andrew Beal (NAIC staff) said the focus would be on insurance company investments and assumptions would be publicly available. Regulators are comfortable with the consultants who have been retained and Beal would arrange for Damron to speak with Mike Moriarty (NY), chair of the Valuation of Securities (E) Task Force, for assurance. Beal said that industry would pay for the ratings because the Securities Valuation Office would do the evaluation and there are filing fees, and all of this information will be on the NAIC website. Damron asked if it was a conflict of interest if the company had to use the NAIC rating agency and be charged for it. McRaith answered that companies are not required to use this service. Commissioner Kent Michie (UT) noted other differences and also warned the Committee that the next shoe to drop will be commercial mortgage-backed securities so the NAIC needs to be prepared.
Director Linda Hall (AK) gave an update on the National Insurance Producer Registry. Hudson gave an update on the Interstate Insurance Product Regulation Commission.
Kennedy thanked Commissioner Sandy Praeger (KS) on the marathon session on healthcare issues. Praeger agreed that it was a terrific session and said there is a lot of work to do and there will be big roles for state legislators going forward once the bill passes.
NAIC/Industry Liaison Committee
Commissioner Susan Voss (IA) chaired the meeting of the NAIC/Industry Liaison Committee.
Deirdre Manna (PCI) and Catherine Paolino (AIA), working with NAMIC and the ACLI, gave a joint presentation, which was an overview of market conduct issues. There is confusion within companies over the Market Conduct Annual Statement (MCAS) and what regulators are looking for. In October Pennsylvania Insurance Department held a day-long symposium on market conduct issues and Manna opined this was a good way to reach out to the industry and share information.
Voss noted that this was not one of the most popular committees and in the past the Committee has met only three times a year. Now that the NAIC would only be meeting three times a year the question is will the Committee be meeting less often? She asked what interested parties wanted to get out of the Committee and if they thought it should continue or be disbanded. Daniel Schwarcz (University of Minnesota Law School) suggested more dialog between the NAIC/Consumer Liaison Committee and the NAIC/Industry Liaison Committee. When asked why litigation data had been collected, Schwarcz responded that litigation is used as a strategic tool to deny claims.
Commissioner Kent Michie (UT) lectured the industry representatives, stating that their business was to pay claims and not to give people a hard time. Bob Detlefson (NAMIC) said the big challenge is to distinguish legitimate claims. Detlefson agreed with Schwarcz that cross-fertilization would be a good idea and the Committees might be more productive if the industry were allowed to speak at the NAIC/Consumer Liaison Committee meetings and vice versa, suggesting it could also stimulate dialog amongst regulators. Voss asked interested parties to provide comments.
Life Insurance and Annuities (A) Committee
Commissioner Thomas Sullivan (CT) chaired the meeting of the “A” Committee. Amanda Yanek, NAIC Government Relations Policy Analyst, gave the federal legislative update. Of interest to the “A” Committee is the Senior Investment Protection Act of 2009 (S.906), which has been incorporated into the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173). Language reflecting the provisions of S.906 can be found in the Restoring American Financial Stability Act of 2009. The NAIC staff is monitoring the Fixed Indexed Annuities and Insurance Products Classification Act of 2009 (H.R. 2733) and continues to monitor the Retirement Security Needs Lifetime Pay Act (H.R. 2748 and S. 1297).
The Committee adopted the report the Annuity Disclosure (A) Working Group, given by Jim Mumford (IA), which included a request for a one-year extension to continue work on revisions on the Annuity Disclosure Model Regulation (#245). The Working Group reviewed the latest draft buyer’s guides and extended the timeline for comment on all three guides. There will be a conference call before the 2010 Spring National Meeting to finalize them.
Kim Shaul (WI) gave the report for the Suitability of Annuity Sales (A) Working Group which included discussion of revisions to the Suitability in Annuity Transactions Model Regulation (#275). Sullivan said that since there is not enough of a consensus the “A” Committee is soliciting additional comments before the Committee adopts the revisions. Sullivan stressed the comments should only be on cleaning up or corrective language. No substantive comments would be considered and the Working Group planned to adopt the revisions during a December 18th conference call. Birny Birnbaum (Center for Economic Justice) wanted to know what Sullivan meant by corrective language and the chairman answered, repeating his previous statement that the spirit and intent of the Model was to be maintained. Birnbaum asked if the call would be open and Commissioner Susan Voss (IA) replied that it would. The Working Group report was adopted by the Committee.
Larry Bruning (KS) read the report for the Life and Health Actuarial Task Force (LHATF). He stated that work remains to be done on VM-20 Requirements for Principle-Based Reserves for Life Insurance Products and VM-25 Health Insurance Reserves Minimum Reserve Requirements and LHATF needs guidance on whether the Committee wants to wait until VM-20 and VM-25 are complete before sending the amendments of the Standard Valuation Law (#820) and Valuation Manual to state legislatures.
LHATF asked for an extension to August 2010 to bring the completed Valuation Manual to the Committee. Commissioner Sean Dilweg (WI) expressed concern that the Manual was not complete and Bruning said they were trying to implement a new framework into the system that will provide an opportunity for uniformity with all states. LHATF and the ACLI are working together on methodology. Paul Graham (ACLI) urged the Committee to wait until August 2010 to adopt the Manual because it should not be brought to state legislators without life insurance language.
Norm Hill (NALC) noted that there is still a substantive amount of work to be done and supported Graham’s comments. Sullivan said that some state legislatures will not meet in 2010 and therefore would have problems with a 2010 implementation anyway. The Committee gave LHATF until August 2010 to complete the Valuation Manual and adopted the report.
Life and Health Actuarial Task Force
Before the first item on the agenda was discussed, there was a motion and second for a resolution that the direction of the meeting would be to adopt a Valuation Manual (VM) by its end. The main issue is that VM 20 (for plain vanilla life insurance) will not be finished by year-end. Several regulators made the point that even if only sections that relate to standards that are already principles-based (e.g. C-3 phase II) are complete, a framework for the process going forward would be provided. The valuation manual will always be dynamic – it will never be “finished” and needs only one standard along with the framework for future standards. Utah stated that it opposed voting for the sake of voting just to say it’s complete. It was pointed out that even if it was adopted at this meeting by LHATF, interim executive/plenary conference calls would need to be held in order that it could be adopted by the NAIC at the next national meeting.
Paul Graham (ACLI) asked what the point was of going out with an incomplete VM – it will cause opposition at the states, and if it is controversial they will say no thanks. If this causes the Task Force gets to vote Principles-based Reserving (PBR) down it will be nearly impossible to reintroduce PBR at a later date. The ACLI has discussed with some Commissioners extending the year-end deadline. New York complained that Plenary did not consult with LHATF as to whether the VM could be in place by year-end; Alaska agreed that the target should be October completion (out of the LHATF by June).
There was continued discussion about what it means to be “done”. Alaska made a motion to draft a letter to Principles-based Reserving (EX) Working Group (PBREX) to discuss what is complete and what isn’t in the VM at the end of this meeting, and ask them to consider whether they want to pass it up without the life insurance part, or whether they wish to extend the completion deadline. The letter will be drafted and reviewed tomorrow.
Preferred Mortality Valuation – Margins:
The AAA reported on a recent study that suggests that there is no need to add a factor to the margin for data confidence, as the 2002 study had a huge amount of data. For company variation there will be some margins. Random fluctuation is the most important issue for a company, and it is not captured in the table development. The joint group (with SOA) believes unknown variations are part of capital, not reserves, so the main point is to account for the company random variation risk, based on the creditability. There is practice note (section 3.3) and a Canadian education note on doing this. The SOA is working on a project that has applied these ideas; the results will be out soon.
A partial creditability factor (aka Z) is the result. The final factor bridges the company data to the industry data based on Z and the random fluctuation load. The reinsurance creditability should be considered by small companies to reflect that the company is only exposed to the random fluctuation risk for that portion of the business that is not reinsured. AAA will make sure they don’t double count the mortality included in C3.
Graham said the difficulty is that random fluctuation on relatively complete data will be a time value issue. He believes it would be less than the 10% in the presentation. The SOA responded that its study of the statistics determined it is less than 10%, but it varies.
Guaranteed/simplified issue:
The AAA subgroup had a few conference calls in the interim. Challenges are that the markets are not homogeneous and the amount of information that the company has when making the offer makes a huge difference. The Subgroup is excluding COLI/BOLI and “real group” insurance. The charge was to do mortality; the Subgroup received approval from the LHATF to add persistency.
Payout Annuity:
The base payout annuity table is in the works and they are trying to fit the older and younger populations. There are problems with a lack of exposure. The trend for younger policyholders is that the project is not worth the effort, but the variation at the older ranges is problematic.
Variable Annuity VM-21:
Tom Campbell reported for the AAA subgroup. He said the group examined what it would look like if the VM was put together without a change to Guideline 43, and what should be imported from the guideline to the VM. The Subgroup is not recommending whether VM-21 is really necessary; the issue is whether it is legal to apply VM-21 retroactively. Campbell’s recommendation is to keep AG 43 in place. Texas suggested that it could be fixed by making adjustments to the scope of VM-21 and fixing the issue in VM-0. LHATF voted to support that suggestion.
Net Premium Reserve (NPR) proposal:
John Bruins (ACLI) discussed the current progress – where are we, what have we decided, what are the results? Companies are looking at the results to determine if the current proposal is appropriate. Discussions continue on the meaning of “in aggregate” when looking at the NPR. The NPR will be the higher of the NPR or the cash surrender value. NPR will be the reserve only if the product passes the stochastic exclusion test and the adequacy test using the NPR. Most products fail the adequacy test (term is an example) and therefore need to do a deterministic reserve.
Most non-design variables are prescribed for the NPR. Mortality will be from the CSO table. Lapses, interest rates, and expenses will be prescribed. South Carolina expressed concern that the lapse rate assumptions were too high.
Companies modeled their 20-year term as a test. Bruins showed the results from age 35. There was significant variation company-by-company between the deterministic and NPR because the tail risk is treated differently in the premium. Companies have to use the higher. The deterministic and NPR are lower than the result based on preferred tables because lapses are counted and they have a different expense allowance.
There was discussion of the results on term and whole life. The ACLI explained some of the anomalies in the ends of the curves for the NPR, reminding the group that in most cases the higher of deterministic or NPR will apply. The ACLI also reviewed its letter making recommendations for VM-20. The NPR should eliminate the need for mortality mapping, reduce the need for prescription in the deterministic reserve, and require further work on reinsurance.
What about riders? The assumption was that the rider would get split out. There continues to be questions on whole contract versus bifurcation of riders. Long-term care riders were an example. There was discussion that the exclusion tests need to be reviewed in terms of whether they are giving the right results, as opposed to whether they are forcing stochastic and deterministic reserves when it is believed they should.
ACLI has committed to be done with this before March for term and whole life to be included in VM-20 and be adopted by Plenary at the August meeting. There will be calls in the interim to discuss the details of the ACLI suggestions.
VM-20 Default Costs:
Gary Falde gave a presentation on the AAA’s progress to date on a method for applying reserve adjustments related to the default costs for assets. The method currently proposed is done on a CUSIP–by-CUSIP basis and uses a “PBR Credit Rating”, the option adjusted spread, the weighted average life of the security, and the projected investment expenses to calculate a cost. In addition, there is an adjustment for the “net spread” of the entire portfolio measured against a benchmark (currently an A3/A rating).
The proposed methodology attempts to capture the price spread of the security over a similarly rated security and the riskiness of the portfolio against the A3/A benchmark. The “PBR Credit Rating” will have 21 different levels, to reach what the AAA felt was the appropriate granularity. If the security is unrated, then the second lowest PBRCR that maps to the NAIC designation will be used. For RMBS, the NAIC designation will be used as well.
Ed Stephenson (BAI for Jackson National Life Insurance) described how the new RMBS method will use the carrying value for determining the NAIC designation and noted that this proposal will not follow that trend. Falde and LHATF agreed that less than par carrying value issue needs to be discussed.
For other assets not covered by NAIC Designation (e.g., whole commercial loans) there was discussion as to whether the company should be asked to map its internal ratings to the table. New York objected, saying that some company’s holdings in this area were too material. Bruning suggested a yield–to-default cost table to be the catch all for things that cannot be determined. New York would prefer to set a single default level based solely on spreads that would cover them simply (and conservatively). Falde pointed out that using the spreads alone would be an incentive for companies to sell and repurchase their securities.
Falde suggested that plugging the company’s internal credit rating into the AAA’s proposed process would adjust the projected cost if the spread on that security does not match the typical spread for that rating. Alaska agreed and there was discussion of possibly establishing a cap on the rating strength for different asset classes. Bruning asked for a catch-all process for those securities that do not line up with the AAA proposal (i.e. undesignated) along with any other suggestions. Falde suggested that to move forward, LHATF could decide to notch down certain classes of securities and to cap the credit bucket of things like whole commercial loans.
New York made a motion that for the unrated classes of securities that a spread-based cost be implemented, and suggested that the limits in the SVL for repurchase assumptions be used. For anything that does not have an NAIC Designation or NRSRO rating, the discount rate would be capped for deterministic and earned rate capped for stochastic. The motion passed with a handful of no votes and abstentions.
Other VM-20 issues:
The VM-20 subgroup held five interim conference calls on the SOA report and AAA feedback on the report. The remaining issues were discussed including what should be sent straight up to LHATF to avoid things being discussed twice: NPR appropriate level of aggregation and guidance on margins. The Subgroup will work on the balance of issues it feels can be resolved to a point where they are non-controversial.
Actuarial Guideline 43:
There was an interim conference call to discuss whether there should be a method specified for change in basis grade-ins, examples of answers for the VACARVM interrogatories, disclosures, and hedging.
There was considerable discussion on reporting the change in basis for the reserve caused by the change in the guideline. The accounting guidance is different than the actuarial norm and doing it as of the beginning of the year will cause systems headaches. The response from SAPWG was that the accounting method is a long-standing rule with many potential consequences and it is not inclined to change it. Bruning wondered if a work-around would be acceptable to SAPWG. Robin Marcotte (NAIC staff) replied that the requirement is explicit in several SSAPs.
Graham pointed out that this requirement differs from the normal accounting circumstance because it is retroactive. He suggested a reasonable approximation of the beginning of the year (the asset adequacy reserve result) be adopted by LHATF as part of AG 43, and the SAPWG could be dragged along with that, without having to change other guidance. Utah agreed. pointing out the AG 43 is statutory and that should raise more sympathy at Statutory Accounting Principles (E) Working Group (SAPWG). Marcotte pointed out that Plenary will meet after the meeting to address a consent agenda, so that it could be done.
There was a motion to define the asset adequacy reserve (not the whole company one) result as an approximation of the beginning of year number for the purposes of SSAP 3, but only for the transition. The motion passed.
Interrogatory 9.2:
There was a suggestion to send a memo to Blanks (E) Working Group on how to fill out interrogatory 9.2 and that it could be posted as informal guidance.
Grade-in:
There was a suggestion as to what the grade-in process for changes to the reserve could be (which would be a permitted practice) and an amendment to the Guideline was discussed and adopted.
The due date for the certification of compliance with AG 43 will be March first, with clarification that the Commissioner may grant an extension. The conditional tail reporting could be based on either paragraphs 5b or 5g, as long as it is disclosed separately.
E&Y brought up an issue related to hedging and the transitions for higher and lower reserves caused by changes in effectiveness and designation. The concerns are how to balance prevention of gaming and ensure that the reserve requirement does not discourage appropriate hedging. This will be discussed on a conference call in the interim.
VM-00:
An amendment on credit insurance issues and the companion amendment to fix the VM-21/AG 43 definition issue were passed.
There is work in progress to ensure that whatever tables are referenced in the VM would be somewhere on the web. Alaska suggested that the same should be done with the standard scenarios. The Subgroup is also working on revisions to create a single source for all definitions. LHATF adopted proposed changes to the VM appendices A & C to straighten out the references to modified portions of the VM. VM-0 is now ready for the initial manual.
VM-30:
June was the last exposure. Alaska thought it was ready to be adopted for the initial VM. Several amendments were adopted including one requiring relevant comments on deviation from the language of the VM and documentation of reliance on other persons or data. There was an amendment proposed to strike the reliance disclosure from the certification. It was rejected. The revised VM-30 was adopted.
VM-31:
VM-31 is still being worked on. It is not needed for an initial VM if the only standard is VM-21, as the documentation requirements for VA are in VM-21.
Non-Forfeiture Law for life and annuities:
The Subgroup is making progress with six months to go before the target. Once the Subgroup is finished it will have to be circulated to other committees.
VM-50 Experience reporting:
PBREX is discussing VM-50. There is concern with the sheer amount of input from many different sources. EX wants a database housed at the NAIC. The industry suggestion is to divide the work into two parts, one for the tables the other for the validation. The agent would collect the data and scrub it, then give it back to the company for submission to the regulator for validation. The data scrubbing that is the hard part. PBREX will work on this with EX.
There will be an initial submission that will determine who will be required to submit the full data dump. The feeling, however, is that everyone is benefiting from the data, so everyone should have a share of the bill.
PBR Scenarios:
There was a presentation of data runs using the PBR models. The question was, for variable annuities, whether to use percentile or 70-CTE. Virginia sees a spike in risk in the tail. For life reserves, there is a gradual rise; 75-85 percentile gets the same answer as 70-CTE. This led to the proposal for a stochastic exclusion test, which looks at sensitivity to interest rates, as opposed to whether there was interest related tail risk.
New York discussed a new test proposal that would compare the 99th percentile to a group of other levels to determine if there is tail risk where CTE would help get a better answer. The expectation is that many fewer products would pass this test. The first thought would be to have the NAIC or AAA generate the seven scenarios on a product-by-product basis; each company would have to run its portfolio against the seven to determine if it had to do stochastic testing.
Dave Nevy (AAA) reported that the LRWG said the AAA had difficulties with the approach. It is easy to determine if there is interest rate risk but much more difficult to determine whether if there is tail risk. It will be difficult to determine the severity of a given scenario on a percentile basis, and thereby identify the seven senarios the company is looking for, without running the 1000 scenarios. He also said that there are reduction techniques in VM-20, and many companies will not run 1000 scenarios.
Regulators agreed with the industry. The AAA continues to stand by its recommendation to use a company generator for interest rate scenarios. Parameters and the 16 exclusion test scenarios will be posted soon.
Reinsurance and VM-20:
The proposed credit for reinsurance seemed to be significantly higher than in the current method. The Subgroup has gone back to the SOA for an explanation.
Other Matters:
The letter to Plenary on whether to extend the deadline was discussed, including what happens if the request is denied? Perhaps VM-21 and the other finished sections could go out as the initial manual. The document would describe the framework and include reserving requirements that are currently principles-based.
The Task Force adopted VM-26 and then adopted the entire package of completed VMs. The LHATF is punting the question of whether the VM as it is (without VM-20 on life insurance) is sufficient to forward on to the legislatures and asking the PBREX and Plenary for direction.
International issues:
There was discussion of what other countries have done in response to the financial crisis. The AAA provided a handout showing much of the response had to do with efforts on segregating liquidity premium and excluding its effect on reserves. Canada allowed lower CTE for cash flows far into the future. Analysts seemed to like this approach and Canadian companies have not had trouble raising capital. The request engendered robust discussion and opened lines of communication.
There was a reminder to the regulators that product compact standards are circulating and a request to please look at them and provide comments.
A Subgroup was formed to consider the issues and make recommendations regarding central processing and analysis of PBR reporting by companies, once the methodology is implemented.
Lastly, there was discussion of the impact of moving to three meetings a year. Is there a more efficient procedure? Will development of an action item list help? Is there need for a one-day interim meeting or can making better use of conference calls solve the issues? This discussion will continue.
Property and Casualty Insurance (C) Committee
Director Michael McRaith (IL) chaired the meeting. The “C” Committee adopted the minutes of the November 16 conference call.
Commissioner Kevin McCarty (FL) reviewed the proposed changes to Chapter 25, Conducting the Advisory Organization Examination, of the Market Regulation Handbook. Commissioner Thomas Sullivan (CT) asked if interested parties had provided input and McCarty replied, “Extensively.” The Committee adopted the changes.
McRaith discussed a request for advice from the Receivership and Insolvency (E) Task Force on public policy issues related to regulatory exclusions in D&O policies. Commissioner Scott Richardson (SC) said that his department has had problems with this issue. Eric Nordman (NAIC staff) suggested this would be a good issue for a public policy discussion and it could be done through a model law or model act. Director Linda Hall (AK) suggested a parallel track working on a model act while advising states of the problem. McCarty thought a revision to the Insurer Receivership Model Act would be a simpler solution. The Committee adopted a motion to advise all states of the exclusionary language and to refer the issue by memo to the appropriate committee or task force for development of appropriate changes to the Insurer Receivership Model Act.
Richardson discussed plans for addressing the use of credit-based insurance scores. He said there is plenty of evidence that credit scoring works but no one knows why. There are also questions about racial and ethnic profiling. A data call in South Carolina found discounts for home insurance ranged from 7.6% to 51% and that surcharges ranged from 1% to 86%. He felt that if insurers use credit scoring then the magnitude should be limited.
McRaith reported he had met with the Market Conduct and Consumers Affairs (D) Committee and its approach was to also collect data. Commissioner James Donelon (LA) was all for collecting data. Sullivan asked what the Committee wanted to do with the data. McRaith answered that there is extreme rhetoric on both sides of the issue and the service that the Committee should provide is information to state legislators. Sullivan expressed concern over what happens next. Richardson said that consumers do not know how the industry determines credit scores so there is a need to investigate in order to provide answers.
John Wells (MS) anecdotally related that Commissioner Mike Chaney’s (MS) insurance score was tied to his credit score and since he was eligible to pay by installments his premium was increased by 10% and he was furious. There will be a public conference call in January that will discuss next steps. A proposal will be presented at that time for a confidential data call with a proposed list of questions. All interested parties are asked to submit suggestions for topics or questions on credit-based insurance scoring.
McCarty stated he had received updates on the Chinese Drywall Public Hearing that morning and would be submitting a report with next steps.
Nordman gave a presentation on takaful insurance, which is an Islamic form of insurance. Director Merle Scheiber (SD) asked about the purpose of the presentation and Nordman said it was for educational purposes but since takaful is tied to a religion and voluntary there are legal ramifications. McRaith added that some states have regulatory exceptions for religious-based non-profits and John Kissling (IN) said that his state has had some experience with the Amish and this exception. McRaith agreed saying that there was a large Amish population in Illinois also.
The Task Force and Working Groups reports were adopted in one motion.
Richard Marcks (CT) gave the report for the Casualty and Actuarial Statistical (C) Task Force, which included adoption of revisions to the Catastrophe Modeling Handbook and adoption of the 2007 Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance homeowners report. Donelon gave the report for the Surplus Lines (C) Task Force. Scheiber gave the report for the Workers’ Compensation (C) Task Force. McCarty gave the report for the Advisory Organization Examination Oversight (C) Working Group. Michael Moriarty (NY) reported that the Catastrophe Reserve (C) Working Group did not meet but will be providing a memo to the Casualty and Actuarial Statistical (C) Task Force for assistance in evaluating the impact of establishing a tax-deferred catastrophe reserve.
Alan Seeley (NM) gave the report for the Consumer Guides (C) Working Group. McRaith reported that the Earthquake (C) Study Group did not meet but there would be an education session the next day. Seeley gave the report for the Title Insurance (C) Working Group. Moriarty reported that the Terrorism Insurance Implementation (C) Working Group did not meet since there were not any issues raised by the Department of the Treasury’s Terrorism Risk Insurance Program or the NAIC but the Working Group is ready to meet when called upon.
Nordman said the Council of Insurance Agents and Brokers (CIAB) and LexisNexis recently announced that they had formed a partnership to develop an insurance exchange. McRaith noted that this was a novel and important development and wanted to arrange a presentation at a future meeting.
Casualty Actuarial and Statistical (C) Task Force
The Task Force met under the leadership of Richard Marks (CT). At the meeting, the Task Force adopted proposed revisions to the Catastrophe Modeling Handbook to reflect advancements in modeling that have occurred since the Handbook was originally created in 2001.
Changes include the following:
• Updated questions a regulator could consider when reviewing a company's catastrophe model (Section VII).
• Updated Appendices 11 (hurricane interrogatories) and 12 (earthquake interrogatories), each with two parts - Part A for an insurer or a rating organization and Part B for a modeler.
• A new Section VIII titled, "Regulatory Review and Acceptance" to discuss proprietary information.
• A new appendix to provide an annotated bibliography of resources available about catastrophe modeling.
• Additional terms and corresponding definitions to add to the Working Definitions Section in the Handbook (e.g., demand surge, shake intensity, dip slip faults).
The Task Force recommended holding periodic conference calls, at least annually, for regulators to discuss current modeling issues or specific questions facing an individual state.
The Task Force adopted the 2007 Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner's Insurance (Homeowners Report). The 2008 Competition Database Report will be competed on a December 17 conference call and is expected to be approved by email ballot and issued by the end of the year.
The Task Force discussed the Profitability (C) Working Group's plans to consider expansion of the lines of business in the report and to examine how premium deficiency reserves are handled in the calculations.
The Task Force requested that NAIC staff determine the cost and feasibility of creating a reporting system suitable for multiple states to receive the data required by the Medical Professional Liability Closed Claim Reporting Model Law (#77).
The Task Force also discussed NAIC activities regarding principle-based reserving, Title Insurance and the Solvency Modernization Initiative; exposure of the Task Force's premium deficiency reserve proposal by the Blanks (E) Working Group; the International Monetary Fund's (IMF) Financial Sector Assessment Program (FSAP); and the American Academy of Actuaries' work. New York asked the Academy to examine the impact of a pre-event funded catastrophe reserve on pricing. The AAA Extreme Events Committee is looking at this issue.
Financial Condition (E) Committee
Accounting Practices and Procedures (E) Task Force
Blanks (E) Working Group: Jake Garn (UT) chaired the meeting. The Working Group adopted minutes from the October 9, 2009 conference call. At the fall meeting the Working Group had received guidance on three items with a comment deadline of October 5, 2009 and they were adopted during the October 9 call:
• Note 5 – Loan-Backed Securities Disclosure Guidance. SAPWG sent guidance illustration for the assistance in the completion of Note 5 – D(4) and 5 – D(5) to be posted to the NAIC website for the third quarter 2009 reporting, 2009 annual reporting, and 2010 quarterly reporting. The guidance was adopted and will be posted to the NAIC website.
• Annual 2009 Investment Category Guidance. Matti Peltonen (NY) sent an investment category breakout sheet to be listed on the NAIC website as guidance for 2009 annual reporting and 2010 quarterly reporting. The guidance was adopted and will be posted to the NAIC website.
• 2009-37BWG - Modify instruction for IMR (Interest Maintenance Reserve) Line 2 and AVR (Asset Valuation Reserve) Line 2 with language for other than temporary impairments. The guidance is intended to assist with the annual 2009 reporting and was adopted and will be posted to the NAIC website.
Action on Items Previously Exposed for Comment:
• 2009-33BWG MOD – Add instruction to Schedule T, Details of Write-ins at Line 58 for Other Alien to clarify the reporting entity should list the jurisdiction (country) for write-in line description and make wording of instruction consistent across statement type. Milum Livesay (Genworth), speaking for interested parties, asked for a dollar threshold. The item was adopted as modified.
• 2009-34BWG MOD - Add instruction to Line 24 of the asset page to include receivables for securities not received within 15 days of settlement date. Modify the exclude statement for Line 9 of the asset page to clarify exclusion of receivables for securities not received within 15 days of settlement date are to be excluded and nonadmitted. The item was adopted as modified.
• 2009-35BWG MOD - Add new annual statement line 17.4 to the Underwriting and Investment Exhibits, Exhibit of Premiums and Losses (state page), Five Year Historical, and Insurance Expense Exhibit of the property statement and the property supplement of the health statement for the reporting of director and officer business. Instructions for the Five Year Historical will also be modified to reflect the new line. Add definition for director and officer liability to the appendix. Livesay said it might be helpful to pass this proposal to the Casualty Actuarial and Statistical (C) Task Force or the Line of Business (E) Subgroup. Bill Sergeant (State Farm) expressed a need for clarification since it was unclear whether the D&O coverage for commercial properties is swept in or can be reported on annual statement line 5. Modifications were adopted and since the proposal is not effective until 2011 the item will be referred to the Working Group’s Line of Business Subgroup and deferred until the spring meeting.
• 2009-36BWG MOD - Add line categories to Schedule S, for life, health and fraternal, to group separately U.S. and Non-U.S. insurers reported in the schedule. Modify the instruction for the Location column to indicate the use of postal code in the column to indicate domiciliary jurisdiction and change the column description from Location to Domiciliary Jurisdiction. Changing property and title Schedule F Location Column description to be consistent with life, health and fraternal and their respective annual statement schedules. The Statutory Accounting Principles (E) Working Group (SAPWG) might be discussing this issue at the same time so NAIC staff will coordinate with SAPWG. The item was adopted as modified.
• 2009-37BWG MOD- Modify instruction for IMR (Interest Maintenance Reserve) Line 2 and AVR (Asset Valuation Reserve) Line 2 with language for other than temporary impairments. The item was adopted as modified.
Action on Newly Submitted Items:
• 2009-38BWG – Add question to the General Interrogatories on establishment of an audit committee and their independence. The item was exposed.
• 2009-39BWG – Modify the instruction and illustration for Note 29 Premium Deficiency Reserves. The data for the illustration will be data captured. The item was exposed.
• 2009-40BWG – Add Fair Value column to Schedule DB, Part B, Section 1, Modify Schedule DB Verification, Line 10 to reference the new column and adjust column references as needed due to renumbering of columns as a result of adding Fair Value column. The item was exposed.
• 2009-41BWG – Adds illustrations to Note 5D(4), (5) and (6) and provide for data capture of those disclosures. In addition Note 5D(2) and 5D(3) from the 2009 reporting are being reversed to provide consistency with the AP&P manual. Note 5D(4), 5D(5) and 5D(6) will be data captured. The item was exposed.
• 2009-42BWG – Add new disclosures to Note 33 for the life and fraternal statements to satisfy new disclosure requirements adopted for SSAP No. 56, Separate Accounts. 33A(2) and 33A(3) will be data captured. The item was exposed.
• 2009-43BWG – Add General Interrogatories to separate accounts statement with questions to satisfy new disclosure requirements for SSAP No. 56, Separate Accounts. The item was exposed.
• 2009-44BWG – Modify instructions for Note 21, Events Subsequent, to be consistent with the changes adopted for SSAP No. 9, Subsequent Events. The item was exposed.
• 2009-45BWG - Add disclosure to Note 22, Reinsurance of the property statement related to disclosure of the transfer of property and casualty run-off agreements adopted in SSAP No. 62R, Property and Casualty Reinsurance. The item was exposed.
• 2009-46BWG - Add instructions and illustrations to property statement instructions for a new note for financial guaranty insurance. The following parts of the note will be data captured: 35A(1)b, 35A(1)c, 35A(2)b, 35A(3)b and 35B. The item was exposed.
• 2009-47BWG – Add a new Note 20, Fair Value Measurement, to reflect additional disclosures required by the adoption of SSAP No. 100, Fair Value Measurements. All notes following the new Note 20 will be renumbered. Note 20A(1), 20A(2) and 20B(1) will be data captured. The item was exposed.
Comment deadline for the newly exposed items is February 24, 2010. All editorial changes were adopted by the Working Group.
The Working Group received a memo from the Life and Health Actuarial Task Force (LHATF) on general interrogatory 9. The non-binding guidance will be on the NAIC website. Any questions on the guidance would go to LHATF.
The Working Group received memos from the Statutory Accounting Principles (E) Working Group on disclosures related to deferred tax assets, financial guaranty insurance, and subsequent events that reporting entities will need to prepare for year-end 2009. This item will be posted to the NAIC website.
Capital Adequacy (E) Task Force
During this meeting the Task Force, under the Chairmanship of Lou Felice (NY), discussed the implementation of the residential mortgage-backed securities (RMBS) proposal. A subgroup of the Statutory Accounting Principles Working Group will be reviewing valuation, reporting, RBC and accounting for the RMBS.
The Task Force discussed an updated derivatives risk mitigation proposal that had been released for comment by the Life Risk-Based Capital (E) Working Group. The proposal would now cover only basic one-to-one hedging transactions and not intermediate hedges for initial implementation. The Task Force voted to allow the Life Risk-Based Capital (E) Working Group to continue developing the risk mitigation proposal and a derivatives collateral proposal until the end of December. A conference call of the Life Risk-Based Capital (E) Working Group will be held before the end of December, potentially to adopt the proposals.
The Task Force also discussed the Life RBC American Academy of Actuaries (AAA) C-3 Phase 3 proposal. Draft instructions had been released for comment by the Life Risk-Based Capital (E) Working Group. The American Council of Life Insurers (ACLI) has been working on proposals for scope limitation and a materiality test. Work will continued toward a potential year-end 2010 implementation. The Working Group will discuss a derivative collateral proposal on a conference call at the end of December during which it will also address one–on-one hedges. It hopes to complete its work on intermediate hedges by March 2010.
The Task Force also received an update regarding the C-3 Phase 2 Results Subgroup. The Subgroup has reviewed several companies and is compiling a list of issues that may eventually lead to items to be added to the Task Force working agenda. The chairman asked that a report be prepared by February.
The Property Risk-Based Capital (E) Working Group reported on an AAA report on modernizing the Property and Casualty RBC formula. The AAA was asked by the Working Group to develop a preliminary report. The chairman reported that a Solvency Modernization Subgroup has been established to look at RBC issues for all business types. On a separate issue, the Working Group reported that it had decided to pursue further validation of RBC Schedule P data filed for the two-year lines of business rather than adding ten years of Schedule P annual statement data to the electronic annual statement filing.
A long-term proposal for addressing commercial mortgages in the life RBC formula was received from the ACLI. The Life Risk-Based Capital (E) Working Group will hold a conference call in January to discuss the proposal and the 2010 mortgage experience adjustment factor calculation.
The Task Force also:
• Adopted new Task Force procedures needed because of moving to three national meetings in 2010.
• Discussed Minnesota's approach to developing a Fraternal RBC law.
• Finalized the working agenda and membership list for the Solvency Modernization Subgroup of the Task Force to be chaired by Alan Seeley (NM). The Task Force will monitor the Solvency Modernization Initiatives work and closely coordinate the P&C work with the Life and Health formulas in line with the priorities of the overall solvency modernization project.
• Adopted the minutes from the November 23 and November 3 Task Force conference calls.
• Decided to hold a conference call in February to discuss whether to request that the Risk-Based Capital (RBC) for Health Organizations Model Act (#315) be added as an accreditation standard. Materials will be distributed for the call to document the states that had currently adopted the model act. A memorandum soliciting comments on the request will be released.
• Decided to discuss a proposal related to short-term capital requirements for reinsurers on the December 17 conference call.
• A charge to the AAA will be developed to look at the risk related to deferred tax assets.
Reinsurance (E) Task Force
The Reinsurance Task Force met briefly in open session under the leadership of Commissioner Scott Richardson (SC) and heard a report from NAIC staff on the status of federal legislation regarding reinsurance and a report from Stephen Schwab (DLA Piper) on the status of the Hague Convention on Choice of Court Agreements which provides for the international recognition and enforcements of judgments.
The Convention was signed by President Bush on January 19, 2009, and the European Community on April 1, 2009. However, the US Senate still needs to ratify the treaty. The National Conference of Commissioners on Uniform State Laws and the US State Department continue to work for Senate approval and may contact the NAIC next year for support according to Schwab. The Task Force then recessed to closed session to discuss the Reinsurance Regulatory Modernization Act of 2009.
Financial Regulation Standards and Accreditation (F) Committee
Superintendent Joseph Torti III (RI), chair of “F” Committee, discussed the proposed implementation guidance regarding the new accreditation standards related to company licensing and change in control. Julie Glaszczak (NAIC staff) reviewed the revisions for the guidance to implement the new Part D standards, which will become effective January 1, 2012. Steve Johnson (PA) suggested that the Committee allow a 60-day exposure period since there was a lot to absorb and the holidays were approaching. Torti noted that Part A needed a more descriptive name than Regulatory Authority. The Committee exposed the proposed revisions for 60 days.
Glaszczak reviewed a referral from the Risk Retention Group (E) Task Force (RRG) regarding Part B and Part C Accreditation Standards and pointed out several substantive changes. Glaszczak said that if non-domestic states wanted to participate the Task Force would ask the domestic state, which would make the decision.
Leslie Jones (SC), chair of the RRG, believed that it could reasonably be a conflict with the federal Liability Risk Retention Act of 1986 (LRRA) to have a domestic state ask the non-domestic state to participate. A non-domiciliary state can ask for an examination and the RRG did not want to require domiciliary states to cooperate but did want to encourage coordination. Concerns were raised within the Committee and Torti reminded them that the recommendations were not going to be adopted but only exposed at this meeting. The Committee voted to expose the RRG recommendations for 60 days.
International Insurance Relations (G) Committee
Commissioner Sandy Praeger (KS) chaired the committee meeting, which included reports from working groups and representatives to various international organizations.
NAIC International Strategy and Action Plans: George Brady (NAIC staff) reviewed updates to the plan including changes on representation on various international committees. George Brady is now one of the NAIC members on the IAIS Executive Committee along with Commissioners Cline (WV), McCarty (FL) and Gross (VA). Brady will also serve on the IAIS Internal Structure Working Group and the newly appointed Financial Stability Committee (along with Commissioners Gross and McCarty). Ramon Calderon (NAIC staff) has been appointed vice-chair of the IAIS Solvency Subcommittee.
International Regulatory Cooperation Working Group: Robert Easton (NY) provided a report on the 2009 internship program. This fall there were 11 interns from five countries – Azerbaijan, China, Egypt, Saudi Arabia, and Thailand. With the completion of the 2009 program, 102 interns from 20 countries will have participated in the training program. The Working Group approved a change in the dates of the 2010 internship program to accommodate the shift to three NAIC meetings a year. The spring session will no longer include a trip to an NAIC meeting. The Working Group also approved a new International Training Curriculum for the week the interns are in Kansas City.
The Working Group received a report on the IAIS-Consultative Group for Assisting the Poor (CGAP) Joint Working Group on Microinsurance from John Durrance (GA). The new partnership was announced at the IAIS annual meeting.
The NAIC announced it will be signing an MOU with the Brazilian Federal Regulatory Agency for Health Plans and Health Insurance (ANS) following the Opening Session.
Ekrem Sarper (NAIC staff) provided an update on bilateral activities with ASAL, Brazil, China, Taipei, Egypt, Japan, Korea, and Russia. The ACLI made a brief presentation regarding its priority country objectives.
NAFTA Working Group: Commissioner Christine Urais (AZ) provided a report on the NAFTA Trilateral Insurance Working Group which has focused on an ongoing effort to obtain changes to the Federal Motor Carrier Safety Administration rule which allows Canadian trucks and buses entering the US to present evidence of their Canadian insurance as proof of “financial responsibility.” The NAIC has proposed a system of notification of any solvency problems with Canadian insurers and a requirement for Canadian insurers to file a power of attorney with the NAIC.
Financial Sector Assessment Program: Ray Spudeck (FL) reported that the first phase of the International Monetary Fund’s FSAP has been completed. In October the IMF visited the NAIC’s offices in Washington, DC, and Kansas City as well as several state insurance departments. A second round of field visits is planned for February. The NAIC has been able to comment on the draft of the Detailed Assessment Report. A final report is expected to be released in June 2010.
International Association of Insurance Supervisors (IAIS): Commissioner Praeger and Yoshi Kawai, IAIS Secretary General, described the five priority areas for the IAIS Executive Committee which will be discussed at the January Executive Committee retreat:
• The Common Assessment Framework
• Financial Stability including systemic risk and macro-prudential issues
• Improvements to the IAIS standard setting activities, especially the review of the Insurance Core Principles and increasing the effectiveness of implementation of the standards, including a possible peer review process.
• External Relations, especially with the G-20, Financial Stability Board, and Joint Forum
• Resources and staffing to meet these goals.
Information sessions on several of these areas will be held during the February 24-26 Triennial Meeting. The IAIS’ October letter to the G-20 on systemic risk in the insurance sector was distributed at the meeting. Steve Broadie (PCI) said it was important for the NAIC and IAIS to reinforce the message that insurers are not banks and should not be regulated like banks.
Solvency Modernization Initiative: Commissioner Gross provided a brief update on the related Solvency Modernization Initiative. He said the SMI Task Force has established a new corporate governance working group.
OECD: The OECD Insurance and Private Pensions Committee met December 4-5 in Paris. Commissioner Christine Urais (AZ) and NAIC staff represented the NAIC as part of the US delegation. Discussion topics included the impact of the financial crisis on the insurance section, catastrophic risks, corporate governance, financial innovation, and financial education.
Joint Forum: Ray Spudeck (FL) provided an update on the Joint Forum which will complete its work on the differentiated scope of regulation by the end of the year. Work on risk aggregation will be finished in early 2010. The new chair of the Joint Forum will be Australia.
EU-US Dialogue: The NAIC met with leaders of the European Union during the IAIS annual meeting in Rio and Commissioner Cline, Danny Saenz (TX), and George Brady attended a CEIOPS seminar on group solvency regulation in November. Third-country equivalence was discussed at both sessions. The NAIC has also offered to host a CEIOPS delegation in Kansas City in January to look at the NAIC’s financial data base, accreditation, and the Financial Analysis Working Group. Morag Fullilove (GNAIE) commended the NAIC for instituting an ongoing dialogue with the industry on issues related to equivalence under Solvency II.
US- Japan Dialogue: An NAIC delegation will visit Japan as part of a US Trade Office program in 2010.
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